The central bank’s policy has gained credibility by taming inflation and anchoring expectations through inflation targeting (4% target since 2017). Moreover, since passing the Fiscal Responsibility Law in 2013, the government has showed restraint in public spending. The fiscal deficit should stay low and stable in 2017 (-1.2%) and 2018 (-1.1%) along with public debt-to-GDP ratio (25.9% in 2017). In addition, the implementation of the New Banking Law passed in December 2016 will be crucial for stronger risk-based supervision.

After president Cartes planned to amend the constitution to allow his own re-election, the country plunged into crisis. Although he eventually backed out in the face of popular protests, renewed political tensions could pose a risk to the pursuit of structural reforms by a new president.

Although the current account balance turned slightly negative, Paraguay should register only small deficits going forward. The deficit is financed by FDI (up to 82% in 2016) and external loans.

Yet export dependency on primary commodities remains very high (90.6%) and Paraguay’s real effective exchange rate correlates to a large extent with commodity prices. Foreign currency reserves cover about 7 months of imports (up from around 5 in 2013), providing an external liquidity buffer.